Azavar Government Solutions Blog

IDOR Sales Tax Collection Fee Impacts Municipalities

Posted by Azavar Government Solutions on Aug 10, 2017 6:01:31 PM

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Local officials across Illinois have been concerned that state government will eventually look to use money ordinarily earmarked for local municipalities to help balance the state budget. That worry became a reality with the override of the governor's veto last month with the budget passed by the Illinois General Assembly.

Now a significant chunk of sales-tax income collected on the local level will become state property due to Illinois’ new sales tax collection fee. Two percent of local sales tax dollars collected on behalf of municipalities and counties by the state will be automatically transferred to state funds. The Illinois Department of Revenue estimates that this new sales tax collection fee generate $60 million per year for the state. 

The impact of this fee will be different for each municipality, causing local officials to begin projecting their potential lost revenue and how it will affect their budgets. According to the Illinois Municipal League, the two percent charge will apply to local government sales taxes and the Regional Transportation Authority and levies by the Metropolitan Pier & Exposition Authority on hotel fees and automobile rentals. 

The new two percent levy won’t apply to the 1.25 percent local share of the state's mandatory 6.25 percent sales tax, only to additional taxes imposed by local municipalities beyond that figure. However, the Illinois Municipal League still forecasts an estimated $60 million-a-year overall cost for local officials. 

List of Affected Municipalities (DOWNLOAD) All communities with a locally imposed sales tax will be charged the two percent fee, which is meant to cover the state's costs of administering the taxes on behalf of local governments (for a complete list of municipalities affected by this fee see attached document). The state-wide forced implementation of the tax comes without recourse or an option for municipalities to opt-out without having to pay the fee. 

Municipalities with a large tax base will be hit the hardest. The fee is expected to cost $75,000 for Arlington Heights next year, $170,000 for Elk Grove Village, $220,000 for Elgin and about $420,000 for Schaumburg. These communities could easily hire a third party or a new staff member to collect the tax themselves, forgoing the state's charge and saving themselves a considerable amount. However, this is currently not an option since municipalities are forced to participate. 

“For a local municipality with a sizable sales tax base, with the two percent sales tax collection fee, they could be forced to pay hundreds of thousands of dollars in collection fees back to the state” said Scott Shamberg, Vice President at Azavar Government Solutions. “This could be crippling for many communities who are already facing tight budgets. They could be faced with very difficult staff decisions when you’re talking about a figure that large.” 

There will be no financial impact for cities, villages and towns that do not have any locally imposed sales taxes, and are only receiving the local share of the state sales tax. However, many of the communities with local sales taxes are scrambling to find ways to manage the impact the new sales tax collection fee will have on their budget. Because of this involvement, it seems obvious that these communities should have more oversight within the Illinois Department of Revenue. 

List of Affected Municipalities (DOWNLOAD)

“If a local government is forced to pay a fee to the state for this sales tax collection, they should also be able to review the sales tax process to make sure they are receiving all their entitled revenue” said Shamberg. “Many communities lack the time, staff, and resources to interpret the poorly exported data and conduct a thorough review. Municipalities are not allowed to have third-parties review it, resulting in them paying more of their revenues and hope the tax collection process is efficient with no ability for oversight. If municipalities must pay for collection of their taxes they should be able to determine the accuracy of the collector to protect their assets.” 

With the state budget crisis, even the extra payments are in question. The Illinois Municipal League opposed the two percent sales tax collection fee and in the weeks ahead, the focus for the communities who are most impacted will be to identify extra funds within their budgets to make up the difference. That could be difficult task for many city leaders who must once again figure out how to make up for another shortfall. 

 

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Topics: Municipal Revenues